Real-time payment systems are becoming more common around the world, and the United States is about to hit its stride in that domain when FedNow debuts. This will have significant implications for all sectors of payments, including the business-to-business (B2B) sector.
In a recent PaymentsJournal podcast, Mike Kresse, Head of B2B and Money Movement at FIS, and Brian Riley, Co-Head of Payments at Javelin Strategy & Research, discussed how real-time payments will play out in the B2B sector, and how the U.S. rollout will differ from how it played in other countries. They also delved into how interoperability, simplicity, and reduced cost will drive rapid adoption of real-time payments, even though that adoption does not have a direct mandate from the federal government. It’s similar to how movie streaming rapidly gained dominance over broadcast television.
Biggest Trends in Global B2B Payments
Although some countries have mandated the use of real-time payment systems for incoming and outgoing payments, the United States has not (yet) done so, reflecting its decentralized, market-driven approach.
“Adoption in the U.S. around real-time payments is going to be more focused around the use cases in specific industries,” Kresse said.
One such use case that is ripe for development is the automation of back-office processes, including collections management and accounts receivable and payable. Such automation is becoming more prevalent as companies seek to streamline their operations through technology.
As FedNow accelerates the adoption of real-time payments, a wider range of banks will seek to plug into its system. This brings opportunities but also certain risks.
“There’s a dark side to real-time payments—many of them become irrevocable, and that’s the problem we’ve seen in the industry as this starts,” Riley said.
As more people become accustomed to using peer-to-peer (P2P) apps to send money to friends and family, they will also naturally become more comfortable with the idea of using these apps for business transactions. As more businesses move online and embrace digital tools, they are also looking for ways to streamline their payment processes and make transactions more efficient. P2P payment apps have paved the way for this shift, and businesses are beginning to see the potential benefits of using these tools for B2B payments.
“It typically starts from a consumer-to-consumer standpoint, where consumers are looking to give other consumers money in real time,” Kresse said. “And ultimately that ends up being manifested in an app that’s typically sitting on a smartphone that’s really simple to use.”
The shift to incorporating the technology in the business world must take into account the different kinds of common transactions. “The consumer world has high volume of low-value transactions,” Riley said. “B2B is a world of low-volume, high-value transactions.” This demands a shift in fraud detection techniques and risk profiling.
As part of the shift toward real-time payments, there will be a move from accrual accounting to real-time ledgers. In accrual accounting, revenues and expenses are recognized and recorded when earned or incurred, regardless of when the actual cash transactions occur. As real-time payments take hold, companies will naturally move away from this.
Increasing Adoption of Real-Time Payments
The biggest drag on real-time payments adoption is the lack of interoperability between payments systems, particularly real-time systems. Globally, it will be important to craft a real-time payments system so hops between distinct systems are minimal.
“Even though The Clearing House and FedNow use the ISO 20022 message format, those systems are not interoperable. You cannot send a message directly on RTP and have it just transfer over to FedNow,” Kresse said
Another potential drag on adoption is that people don’t necessarily know why real-time payments are necessary or even a significant improvement on existing technologies. Given that there will not be a U.S. mandate for adoption of real-time payments, companies will have to actively market their solutions to address these concerns.
Use cases ideally should benefit payers and payees. A good example is the request-for-payment feature, in which customers can see their bill balance change in real time once they’ve made a payment. In that scenario, customers can pay their bills closer to the wire and have a more user-friendly interface, while the biller can receive the funds quicker.
Technology companies should also make the transaction process as simple and efficient as possible by minimizing the number of steps or intermediaries involved. Solutions should be intuitive and easy to learn.
“My 20-year-old should be able to pick it up and start using a B2B app immediately like they would be able to use an app on their phone even though it’s a business-facing application,” Kresse said.
Riley also added that real-time payments should have the simplicity and elegance to make them a no-brainer, like other payments technology. “When you look at the elegance of a credit card transaction, people swipe and they just assume it goes into it down the process,” he said. “But there’s a lot that goes on beyond that velvet curtain. And when you’re dealing with money movement cross-jurisdictions in a business-to-business environment, it’s much more complex, but it still has to have that same elegance.”
Over the next decade, expect to see a few key developments play out worldwide, including interoperability, as well as a continued push to immediacy.
“If we think back to 20 years ago, the concept of me being able to automatically stream any movie from my phone anywhere in the world, through any of the number of streaming services, was not something that we saw materializing really quickly,” Kresse said. “Yet within 10 years, we were absolutely there.”
The same will be true of payments.
Furthermore, as the real-time payments systems become more interconnected, costs will decline.
“Ten years from now, we’ll be on our path to being able to send anyone money anywhere in the world at a very low cost, in a way that is safe and simple,” Kresse said.